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South Asia Investor Review is focused on reporting, analyzing and discussing the economy and the financial markets of countries in South Asia, including Pakistan, Bangladesh and Sri Lanka. For investors looking to invest in emerging markets beyond BRIC countries (Brazil, Russia, India and China), this blog is designed to help international investors looking to learn about investing in South Asia with focus on Pakistan. Riaz has another blog called Haq's Musings at http://www.riazhaq.com

Is America Losing Its Edge?

There is a huge difference between original breakthroughs and incremental improvements in science and technology and new applications. What often passes as innovation in China and India and other emerging nations almost always fits in the latter category. Examples of the former category include Gutenberg printing press, incandescent light bulb, internal combustion engine, radio, telephone, transistor, semiconductor chip, microprocessor, the computer operating systems and programming languages, the Internet, and the discovery of the DNA Helix. All of these original ideas have come from the West, most of them from the United States. It is healthy for Americans to be constantly looking over their shoulders to see how several emerging nations, including India and China, are making significant strides in trying to catch up with them. However, I believe a lot of the concerns today about the US losing its edge anytime soon are overblown, just like the concerns in the 1980s about Japan leaving the US behind in semiconductors. I remember how the Intel founder Gordon Moore responded to such concerns by the US media in the 1980s. He analogized Intel with a driver driving on a dirt road in the dark with no maps or signs, and the Japanese semiconductor industry following the tail lights of Intel as the leader in front. As long as the Intel tail lights are there, others can follow them. But the situation changes dramatically when the tail lights are no longer there and the follower has to find his or her own way. The situation is quite similar today, except that the number nations following the US tail lights has increased beyond the Japanese to include BRIC nations. There are many ingredients that account for the significant edge the Americans continue to have over others. These include a)America's education system that emphasizes openness, free inquiry, creativity, reasoning, research, and debate rather than submissive rote learning, b) the culture of risk-taking backed by the availability of risk capital from venture capital firms, c) massive government investments in basic research, higher education, infrastructure, and human development, and d)insatiable demand for new ideas, products and services in the marketplace.

There have been many attempts to replicate Silicon Valley in many parts of the world, but none have had successes comparable to the original Silicon Valley in California. The original Valley is not the result of any planning, but the outgrowth of the culture of achievement, innovation and risk-taking that is hard to replicate. At least part of the success of the Valley comes from its ability to absorb people and ideas from across the world. Most high-tech companies in the Valley resemble the United Nations, with representation of men and women of all ethnicities, religions and races from all parts of the world, including China, India, Israel, and Pakistan.

BANGALORE, India — In the United States and Europe, people worry that their well-paying, high-skill jobs will be, in a word, “Bangalored” — shipped off to India.

People here are also worried about the future. They fret that Bangalore, and India more broadly, will remain a low-cost satellite office of the West for the foreseeable future — more Scranton, Pa., in the American television series “The Office,” than Silicon Valley.

Even as the rest of the world has come to admire, envy and fear India’s outsourcing business and its technological prowess, many Indians are disappointed that the country has not quickly moved up to more ambitious and lucrative work from answering phones or writing software. Why, they worry, hasn’t India produced a Google or an Apple?

Innovation is hard to measure, but academics who study it say India has the potential to create trend-setting products but is not yet doing so. Indians are granted about half as many American patents for inventions as people and firms in Israel and China. The country’s corporate and government spending on research and development significantly lags behind that of other nations. And venture capitalists finance far fewer companies here than they do elsewhere.

“The same idea, if it’s born in Silicon Valley it goes the distance,” said Nadathur S. Raghavan, a investor in start-ups and a founder of Infosys, one of India’s most successful technology companies. “If it’s born in India it does not go the distance.”

Mr. Raghavan and others say India is held back by a financial system that is reluctant to invest in unproven ideas, an education system that emphasizes rote learning over problem solving, and a culture that looks down on failure and unconventional career choices.

Sujai Karampuri is an Indian entrepreneur who has struggled against many of these constraints.

His Bangalore-based company, Sloka Telecom, has developed award-winning radio systems that are more flexible, smaller and less expensive than equipment used by phone companies today. Mobile phone companies and larger telecommunications equipment suppliers are buying and testing his products, but he has not been able to interest Indian venture capitalists. For the last five years he has run his firm on $1 million he raised from acquaintances.

“I can only afford to trial with one customer at a time and that takes three months to materialize,” said Mr. Karampuri, who has considered moving the company to the United States to be closer to venture capitalists who specialize in telecommunications. “You are always worried about paying next month’s salary to people. Should you keep the money for this trial or next month’s salary?”

Companies like Sloka Telecom are important, analysts say, because they are more likely to create the next wave of jobs than large, established Indian technology companies, many of which are experiencing slower growth. These companies could also help offset some of the outsourcing jobs the country will likely lose because of greater automation and competition from countries where costs are even lower.

There are historical reasons that starting a business in India is difficult. During British rule, imperial interests dictated economic activity; after independence in 1947, central planning stifled entrepreneurship through burdensome licensing and direct state ownership of companies and banks.

Businesses found that currying favor with policy makers was more important than innovating. And import restrictions made it hard to acquire machinery, parts or technology. Inventors came up with ingenious ways to overcome obstacles and scarcity — a talent Indians used the Hindi word “jugaad” (pronounced jewgard) to describe. But the products that resulted from such improvisation were often inferior to those available outside India.

“We were in an economy where, forget innovation, expansion was discouraged, creating wealth was frowned upon, there was no competition to speak of,” said Anand G. Mahindra, who heads the Mahindra & Mahindra business group and has spoken about the need for more innovation.

Indian leaders began embracing the free market in the 1980s and stepped up the pace of change in 1991 when the country faced a financial crisis. Those changes increased economic growth and made possible the rise of technology companies like Infosys and Wipro, which focused on providing services for American and European corporations.

Yet, the government still exerts significant control, especially in manufacturing, said Rishikesha T. Krishnan, a professor at the Indian Institute of Management in Bangalore.

“To start a services company it really takes you just two or three days to get going,” said Mr. Krishnan, whose book, “From Jugaad to Systematic Innovation: The Challenge for India,” is to be published next year. “The moment you are looking at manufacturing, there are hundreds of inspectors and regulations.”

Raising money is one of the biggest challenges entrepreneurs face. Venture capital funds have flocked to India in recent years, but they are more likely to invest in established businesses than young firms.

In the United States, Israel and elsewhere, the initial, or seed, capital for many start-ups comes from rich individuals known as angel investors. But most rich Indians prefer to invest with family members or close friends because its considered safer and provides assurance that the lender will be able to borrow from relatives in the future.

“If you want to raise $3 to $4 million, it’s doable,” said Sumir Chadha, who co-heads Sequoia Capital’s Indian operations. “But it’s difficult if you want to raise $300,000 or $400,000,” a typical investment at the early stages of a company’s life.

When Cellworks Group, which has most of its operations in Bangalore, was looking to raise money last year, executives talked to venture capitalists here and abroad. But the company raised all of the money it needed in the United States, because most local investors did not have the expertise to evaluate the biotech firm, said Taher Abbasi, the chief executive.

Cellworks has planted its corporate headquarters and a small staff near San Jose so it can be close to investors and American universities for research collaboration on cancer drugs.

“To really kick off entrepreneurship without local money is very difficult,” Mr. Abbasi said.

Still, he said, India has its advantages. Engineers and biologists are plentiful, though they need to be trained more than their counterparts elsewhere. And operating costs are a lot lower than in the San Francisco Bay Area, which was critical more than two years ago when he and his partners started the company with their own money.

There may yet be hope for Indian innovation.

Some are looking to fill the venture fund vacuum. A group called Mumbai Angels holds Saturday meetings every two months at which entrepreneurs pitch ideas to affluent investors. Members of the group have invested in about 20 companies, said Prashant Choksey, a co-founder.

Separately, N. R. Narayana Murthy, the chairman of Infosys, recently sold $38 million worth of shares in his company to start a new venture capital fund. Mr. Raghavan, the former Infosys executive, has invested about $100 million in start-ups like Connexios Life Sciences, which is developing drugs to treat diabetes and other diseases. Many Indian universities have also started entrepreneurship programs and classes.

Vivek Wadhwa, a former technology entrepreneur who now researches innovation, said the climate for start-ups in India was a lot better than it was a few years ago. It should continue to improve, he said, in part because companies like General Electric have hired tens of thousands of engineers in India to work in research and development.

“Once they have been working on these projects for a few years they will outgrow the companies that they are working for,” he said. “They will hook up with these entrepreneurs that failed” on previous start-up attempts and create new companies.

Another change may augur well. Until early this decade, the Indian market was too small and isolated to make it very lucrative for businesses to develop products here, so most technology companies focused on selling services to the West, said Girish S. Paranjpe, joint chief executive of Wipro’s information technology business. “That will change dramatically because the Indian market has become bigger,” he said.

In the last eight years, the size of the Indian economy has roughly doubled along with the importance of foreign trade. There could still be something to envy and fear.

Comments

In Silicon valley recently, the US federal government has pumped in about $500 million each into two green tech startups..Solyndra pv solar and Tesla all-electric cars. Obama was here this week to promote green tech and spoke to Solyndra employees.

In addition, there is $1 billion in federal grants being offered to biotech firms under the new healthcare bill.

The reason for US supremacy is partly explained by how much of its public funds it spends on higher education. A 2006 report from the London-based Center for European Reform, "The Future of European Universities" points out that the United States invests 2.6 percent of its GDP in higher education, compared with 1.2 percent in Europe and 1.1 percent in Japan.

DHARWAD: India may not compete with other countries in the field of science and technology (S&T) if our scientists fail to make serious efforts to improve the track record in the field of scientific research and development (R&D), said VTU vice-chancellor H Maheshappa.

Inaugurating a six-day workshop on `Graph algorithms' jointly organized by the department of Computer Science, Karnatak University, and VTU here recently, he said India's track record in the field of scientific R&D has remained insignificant when compared with countries like China. This trend has to be changed if we really wish to emerge as successful competitors and carve a niche for India in the field of S&T, he said.

Pointing out the progress achieved by China in this regard, he said China is far ahead of India in the field of scientific R&D. "While the researchers from China file hundreds of patent applications everyday, India stands not even nearer to China in this respect. He said India has potential, including talented pool of teachers and researchers, state-of-the-art research institutes and financial investment by the government for the promotion of scientific R&D.

Expressing concern over the lack of teachers with research background in technical educational institutes, he said though the state has nearly 200 engineering colleges, the number of teachers with research degrees is minimal. "This scenario has to be changed. VTU has plans to tie up with universities like Karnatak University to assist engineering college teachers on understanding of basic science and research methodology," he added.

China poised to surpass US in research papers publication, according to The Guardian:

China could overtake the United States as the world's dominant publisher of scientific research by 2013, according to an analysis of global trends in science by the Royal Society. The report highlighted the increasing challenge to the traditional superpowers of science from the world's emerging economies and also identified emerging talent in countries not traditionally associated with a strong science base, including Iran, Tunisia and Turkey.

The Royal Society said that China was now second only to the US in terms of its share of the world's scientific research papers written in English. The UK has been pushed into third place, with Germany, Japan, France and Canada following behind.------------In the report, published on Monday, the Royal Society said that science around the world was in good health, with increases in funding and personnel in recent years. Between 2002 and 2007, global spending on R&D rose from $790bn to $1,145bn and the number of researchers increased from 5.7 million to 7.1 million.

"Global spend has gone up just under 45%, more or less in line with GDP," said Llewllyn Smith. "In the developing world, it's gone up over 100%." Over the same period, he added, the number of scientific publications went up by around 25%.-----------Projecting beyond 2011, the Royal Society said that the landscape would change "dramatically". "China has already overtaken the UK as the second leading producer of research publications, but some time before 2020 it is expected to surpass the US." It said this could happen as soon as 2013.

China's rise is the most impressive, but Brazil, India and South Korea are following fast behind and are set to surpass the output of France and Japan by the start of the next decade.-----------The overall spread of scientific subjects under investigation has remained the same. "We had expected to see a shift to bio from engineering and physics [but] overall, the balance has remained remarkably stable," said Llewellyn Smith. "In China, [the rise] seems to be in engineering subjects whereas, in Brazil, they're getting into bio and agriculture."

As it grows its research base, Llewellyn Smith said that China could end up leading the world in subjects such as nanotechnology. "The fact is they've poured money into nanotechnology and that's an area where they are recruiting people back from around the world with very attractive laboratories – that's my feeling."

In addition, there are new entrants to the scientific community. "Tunisia in 1999 had zero science budget – now it puts 0.7% of GDP into science," said Llewllyn Smith. "This isn't huge but it's symbolic of the fact that all countries are getting into science. Turkey is another example. Iran has the fastest-growing number of publications in the world, they're really serious about building up science."

Turkey's R&D spend increased almost six-fold between 1995 and 2007, said the Royal Society, and the number of scientists in the country has jumped by 43%. Four times as many papers with Turkish authors were published in 2008 as in 1996.

In Iran, the number of research papers rose from 736 in 1996 to 13,238 in 2008. Its government is committed to increasing R&D to 4% of GDP by 2030. In 2006, the country spent just 0.59% of its GDP on science.

.....It is the robustness of scientific research and innovation that sets apart great powers from the mediocre ones.

We have good scientists, but why has India not produced outstanding scientists who make path-breaking discoveries that will make the world sit up and take notice? Should we continue to be satisfied with tweaking borrowed technologies? Is reverse engineering an innovative phenomenon?

All debates about scientific research inevitably end up zeroing in on the deficiencies of our educational system as the root cause of the abysmal record in scientific research. This is only part of the story.

A nation's culture — belief systems, values, attitudes — plays a significant role in determining the quality of scientific research. The Oriental attitudes differ from the Occidental values in many respects. Asian societies are basically collectivist, that is, the collective good of society ranks higher than individual happiness and achievements. People do not ask what they can do for their country; they are always asking what the country will do for them. They look up to the state for guidance, leadership and direction. There is no burning individual ambition to excel and achieve something new.

In the West, individuals try to achieve their potential through their own efforts, aided and facilitated by enabling laws and institutions. Self-reliance is the key objective of life. An independent life requires a free and questioning mindset that takes nothing for granted and constantly challenges conventional wisdom. Children are encouraged to push the frontiers of knowledge by self-examination and open-minded enquiry. It is only a sceptical and dissenting mind that often thinks out of the box to explore new vistas of knowledge.

Collectivism promotes conformism and deference to authority whether it is parents, elders, teachers or the government. It is heresy to question established values and customs.

We pass on our passivity and uncritical attitudes to our children. No wonder, the educational system encourages rote learning and unquestioning acceptance of what is taught in the classrooms and stated in the textbooks. How can we expect our children to suddenly develop an enquiring and inquisitive attitude when they have been brought up in a milieu that discourages ‘disruptive' thoughts?

India and China were once advanced nations before foreign rule drained their resources and sapped their willpower and scientific traditions. Cultures tend to become conservative and defensive when subjected to long spells of colonial exploitation.

Indians are great believers in destiny. But our tradition does not frown upon free will and individual excellence. We must realise that our ability for free action remains unhampered despite what destiny may hold in store for us.Fear of failure

Another flaw in our culture that prevents individual excellence is the fear of failure. The stigma associated with failure makes our children risk-averse while choosing their courses and careers.

Scientific research is a long-drawn war on received wisdom that requires many battles before it can be won. Science was not built in a day. Some of the battles can end in defeat. In the West, they celebrate failure as a stepping stone to success.

Educational reforms must be preceded by mental deconditioning of parents, teachers, educationists and policymakers — throwing away the cobwebs of uncritical submissiveness to conventional knowledge. Let us bring up a generation that will not hesitate to ask inconvenient questions. This generation will be the torch-bearer of a scientific revolution that will unleash cutting-edge research to make the Nobel Prize committee sit up and take notice....

... China's 1.3 billion upwardly mobile people are voracious consumers of everything from cars to smartphones to Kentucky Fried Chicken. Through its relentless exports, China has amassed a mountain of cash reserves and made itself Washington's biggest foreign creditor.However, the China that vacuumed up factories to become the Workshop of the World is fading into history. The country is a victim of its own success. Decades of nonstop growth have forever altered China's place in the global economy and changed how it must compete with rich nations like the U.S. and emerging economies like India. The tools that China has used to spark its economic miracle — government support, cheap labor, state-directed finance — cannot ensure its future. The country can no longer rely on just making lots of stuff; China has to invent things, design them, brand them and market them. Instead of following the leaders of global industry, China has to produce leaders of its own.Such a transition is not easy. Few emerging nations in modern times have made the leap from assembler to inventor, copycat to innovator. For China, this would mean an overhaul of its economy. Many of the products China manufactures today aren't really very Chinese at all. Apple iPads might be exported from assembly lines based in China, but the Chinese themselves do little more than piece them together. The core technologies come from elsewhere, and even the factories are run by foreign firms (like Taiwan's Foxconn). For Chinese companies to compete with the world's best, they have to create products of their own that have a similar impact as the iPad. That requires a set of skills and know-how they don't yet possess and a level of managerial expertise they haven't yet developed. Economist William Janeway, author of the book Doing Capitalism in the Innovation Economy, says what has gotten China thus far won't be enough for the next step: "It is hard to start the process of pushing the frontier with [such] practices and policies."Chinese policymakers fully realize that. The new leadership team in Beijing, ushered into office a year ago, has pledged to press ahead with free-market reforms — liberalizing finance, supporting private enterprise and cracking open protected sectors. "China's modernization will not be accomplished without reform, nor will it be achieved without opening up," Premier Li Keqiang recently conceded. So far, though, progress has been slow. Few meaningful initiatives have been introduced, and even headline-grabbing measures — like the September launch of a special zone in Shanghai to experiment with freer capital flows — have proved mere baby steps. Li and his mandarins must take on vested interests and rein in an overbearing bureaucracy, which will require formidable political will. China's leadership "is not ready yet to deliver a comprehensive reform package with executable specifics and clear timetables," Bank of America Merrill Lynch economists warned in October.Whether China succeeds or fails will determine where everything from sneakers to cars to smartphones are manufactured, the brands that appear on them and who sells them. Failure could stall China's economic miracle and dampen global growth with it. Here are five challenges China must address:

1. Labor is no longer cheap2. Companies lag behind in technology3. Innovation doesn't come easy4. There are too few global brands5. Good managers are hard to find

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I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
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